Many cross-border payments of UK-source interest are subject to
deduction of tax at source under UK domestic tax laws, although
many non-UK recipients of such interest are eligible to have their
potential UK tax liabilities removed or reduced under the terms of
one of the UK's numerous double tax treaties.

In principle, it is necessary for a formal application for
treaty relief to be made before any UK-source interest can
legitimately be paid to a non-UK party without deduction of tax at
source by the paying party, and the same general administrative
regime applies to both companies and individuals seeking treaty
relief for cross-border interest payments. However, in the case of
corporate lenders and borrowers the basic administrative
system has been subjected to various modifications over time, and
some significant changes to this modified system have been
introduced with effect from 1 September 2010.

The new aspects of the UK's administrative system for treaty
relief for cross-border corporate loans are summarised briefly
below. Please note that these new approaches to tax administration
only apply to withholding tax on interest and not to any
withholding tax that might be applicable to cross-border payments
of UK-source rent, royalties or (in those rare situations in which
this is still a live issue in a UK context) dividends.

Please also bear in mind that, although a borrower has the
primary administrative responsibility to deduct any UK tax that is
properly deductible at source, it is the primary responsibility of
the lender to seek any tax relief that may be available
under the terms of an applicable double tax treaty. This is because
it is the lender that is the taxpayer in respect of interest
receivable, even though the borrower may be saddled with most of
the accounting and reporting obligations of a taxpayer in a case
involving a lender based outside the jurisdiction.

The new 'passport' scheme for foreign corporate
lenders

It was already possible before September 2010 to obtain a form
of provisional treaty relief for UK-source interest payments
arising under certain types of cross-border corporate loan. But the
aim of the UK's new passport scheme is to provide a more
streamlined form of general pre-clearance for particular
parties to lending arrangements, rather than particular
loans.

Under the new administrative system (which formally commences as
from 1 September 2010 but which has in fact already been operating
informally for several months, so as to enable interested parties
to seek relevant approval from the UK tax authorities) foreign
corporate lenders may seek general advance approval from the UK tax
authorities as bodies that are entitled to make applications for
future UK-source interest on loans to be paid on a gross basis
under the terms of an applicable double tax treaty.

The general idea is that an eligible body should submit to a
single advance screening process as a result of which that body
obtains a registration number that is included in a publicly
available register maintained by the UK tax authorities. Any
foreign corporate lender that is able to quote such a registration
number to a UK-based corporate borrower is thereby entitled to make
a streamlined application for the UK tax authorities to issue a
formal direction to an affected borrower, enabling that borrower to
make interest payments without deduction of UK tax at source.

Such a registration thus operates as a kind of general
'passport' to relevant tax treaty benefits for a defined
period that is determined by the UK tax authorities. It seems that
the usual period of validity will be five years, which is already
the usual length of time for the validity of any formal directions
issued by the tax authorities to a borrower in any particular case
of treaty-based applications for relief from deduction of tax at
source. However, it should be noted that the duration of validity
of either a passport or a specific direction to pay gross interest
is a matter which wholly lies within the general administrative
discretion of the tax authorities; there is no specific legal right
to claim the benefit of such facilities for any particular length
of time.

Since the new passport regime only provides a streamlined
administrative means of accessing the traditional system of
obtaining double tax under tax treaties it is still necessary to
ensure in any particular case, that a borrower is in fact properly
authorised by the tax authorities to dispense with the basic
requirement to deduct tax from cross-border interest payments.

This means that, once a particular passported loan has been
entered into, both the lender and the borrower must submit
prescribed application forms to the UK tax authorities within
specified time limits, so as to notify the authorities that a
particular cross-border loan has been entered into under the terms
of the lender's passport. Formal approval of gross payment of
interest is then granted (or, as the case may be, refused) in
relation to each particular loan that has been notified to the tax
authorities under the passport scheme.

Various conditions attach to the issue of a registration number
under this new regime and various sanctions are available to the
tax authorities in respect of non-compliance with relevant
conditions. The ultimate sanction is expulsion of a foreign lender
from the scheme, which would mean that an affected party then had
to make wholly separate formal applications for tax relief under
any applicable tax treaties in relation to any future interest
payments due from UK-based borrowers.

The new administrative system is entirely optional and it still
remains open to foreign corporate lenders from September 2010
onwards to seek specific approval of particular loans under the
formal tax treaty mechanisms, either generally (i.e. without
seeking any clearance at all under the new passport regime) or in
relation to particular loans (i.e. after the lender has
successfully obtained a passport but has decided, for some reason,
not make use of that passport in a particular case, such as in
relation to a loan which the lender had been advised to discuss
with the tax authorities in views of doubts about its fundamental
eligibility for treaty relief).

Nothing in the new regime removes or reduces the desirability of
ensuring, from a lender's perspective, that a loan agreement
contains comprehensive contractual protection against the
possibility of deduction of tax by or on behalf of a borrower.
Therefore, a general grossing-up clause should still always be
included in any loan agreement that is drafted on behalf of a
foreign corporate lender, whether or not passport eligibility is in
issue. However, a borrower might wish to consider inserting a
contractual requirement to the effect that a lender must use all
reasonable endeavours to obtain and utilise a registration number
under the new passport scheme, if there is any material risk that
the failure to do so would increase the borrower's total
exposure to the lender under the loan.

Syndicated corporate loans

A form of provisional treaty relief was originally introduced
into UK tax administration in 1999 but that scheme has now been
amended so as to take account of the introduction of the new
passport scheme with effect from 1 September 2010.

The earlier form of provisional relief applied (although in
different ways) to both syndicated corporate loans and one-to-one
corporate loans but the latter element of the original scheme is
now considered unnecessary in view of the introduction of the new
passport scheme. Therefore, no new applications for provisional
treaty relief for interest payments arising from one-to-one loans
may be made after 31 August 2010.

The remainder of the original provisional relief scheme is now
rebranded as 'the syndicated loan scheme'. Broadly
speaking, this enables complex multi-party and/or
multi-jurisdictional lending arrangements to be made subject to a
single application for treaty relief on behalf of the all eligible
foreign lenders participating in the lending arrangements, with
that single application for tax relief being channelled through an
appropriate body that undertakes to act as syndicate manager for
this purpose.

Changes in the membership of a syndicate will not necessarily
need to be reported to the tax authorities on an individual basis,
provided that the overall UK tax profile of a syndicate is not
altered as a result (for example, no specific reporting of
syndicate changes would usually be required if one lender that was
eligible for a 10% rate of tax under a double tax treaty was
replaced by another lender that was also eligible for such a 10%
treaty rate).

Foreign lenders are eligible in principle for inclusion in the
SLS regime if, from a UK perspective, they have the character of
companies. In this respect, one of the key characteristics of a
lender is a lack of tax-transparency, so that participation in the
SLS regime will not generally be available to lenders that are
partnerships nor will participation be open to certain other types
of legal body (such as US LLCs) that are regarded by the UK tax
authorities as transparent for tax purposes.

However, this does not necessarily mean that a loan involving
partnerships or other tax-transparent bodies will be incapable of
being covered by the SLS regime. This is because it will still be
possible under certain conditions (for example, where no more than
20% of total indebtedness is held by ineligible bodies) for a
syndicate manager to seek permission to pay interest without
deduction of tax in respect of any lenders that are companies based
in suitable treaty-protected foreign jurisdictions. One of the
syndicate manager's responsibilities will be to identify
different taxable categories of lender, so that the tax authorities
are able to authorise payments on a 'block' basis to
sub-groups of syndicated lenders who are entitled either to full
exemption from UK tax or reduced treaty rates of taxation.

There are various conditions which must be satisfied before a
particular loan will be considered eligible, such as the
requirements for the loan to be on fully commercial terms and for
the lenders to be unrelated to the borrower.

The UK tax authorities must also be satisfied that the proposed
syndicate manager (which could potentially be the borrower) is a
suitable person to co-ordinate applications for tax relief on
behalf of a number of foreign parties. Both the membership of a
syndicate and the syndicate manager's administrative practices
are liable to periodic scrutiny by the UK tax authorities, in order
to ensure that the SLS regime is being implemented properly by the
parties involved in relevant syndicated loans.

The tax authorities expect syndicate members to demonstrate a
serious long-term commitment to the SLS regime and the SLS facility
will not be made available in any particular case if it appears to
the authorities that there is a lack of such commitment for the
full anticipated life of a syndicated loan

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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Since we have seen a focus and clamp down on tax avoidance/evasion and suggestions in the media that tax planning of any form is immoral if not illegal, some people have become nervous about taking any tax planning steps at all.

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